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Zambia mining, a global case study of mismanagement

In the 1970s, Zambia was the third largest exporter of copper in the world. Today, are Zambia's economic woes due to the nationalisation of its copper mines?

by David Mwanambuyu On April 12, 2011

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Zambia has become a global case study in the mismanagement of mining operations. The country’s ill-fated nationalisation programme should make the likes of ANC Youth League (ANCYL) president Julius Malema tone down their fiery rhetoric and listen to what they do not want to hear: the possibility that mine nationalisation in South Africa could plunge headlong into the dungeon of collapsed state enterprises.

The most important question is: Who will manage and capacitate these mines once turned over to the state? How will the state handle the skills and capital flight in the aftermath of nationalisation?

It is dumbfounding that, while a delegation of the ANCYL undertook a study tour of Venezuela, to get first-hand insights into Hugo Chávez’s natioanlisation programme, they have resisted a shorter trip across the Limpopo to learn some bitter lessons from Zambia’s failed exercise to run its copper mines.

The Zambian mines were re-privatised in a protracted process, with Luanshya Copper Mine the first to go under the hammer in 1997.

But for about a decade since independence from Britain, copper was Zambia’s lifeblood.

The road to self-destruction, however, was cast in stone in 1970, following the Mulungushi Economic Reforms of 1968, which paved the way for greater state intervention in the economy through the Matero Declaration. This resulted in Dr Kenneth Kaunda’s government declaring an intention to acquire equity holdings of 51% or more in a number of key foreign-run firms in the southern African country.

The previous owners of the mines were offered management and marketing contracts – an arrangement that lasted until 1974, when the government terminated these pacts.

Instead, it appointed the first Zambian managing directors in David Phiri and Wilson Chakulya to head Roan Consolidated Mines (RCM) and Nchanga Consolidated Copper Mines (NCCM), respectively.

The effect of these economic reforms was more profound and far-reaching in the key mining sector.

The country is the world’s 11th largest producer of copper, with an excess of two billion tonnes of copper still to be extracted.

In 1964, it was the third largest copper producer in the world, exporting more than 700,000 tonnes per annum and ranked among the most prosperous countries in Africa, according to Consultancy Africa Intelligence (CAI).

Zambia’s over-dependence on copper is best illustrated by these statistics: Copper contributes 40% to Zambia’s gross domestic product, and makes up 95% of the country’s exports.

About 62% of government tax revenue comes from copper receipts.

For 30 years, copper production declined steadily from a high of 700,600 metric tonnes to a low of 226,192 metric tonnes in 2000.

The decline was a result of poor management of the state-owned mines by Zambia Consolidated Copper Mines (ZCCM), and a considerable lack of investments.

Other factors were lower copper prices in the global commodity markets and Zambia’s inability to raise capital and lack of skills to run these mines.

The rot began when the Zambian government acquired majority holding in the country’s operations of the two major foreign-owned mining corporations – Anglo American and Rhodesia Selection Trust (RST), which morphed into NCCM and RCM, respectively.

The mines’ decay accelerated in 1982, when NCCM and RCM merged to form the ZCCM, with Francis Kaunda (no relation to the president) becoming chairperson and chief executive officer. He held on to this position until 1991, when he was relieved of the job by the new government, following the defeat of Dr Kaunda in that country’s first multi-party presidential and general elections.

Strategic reasons for Zambia’s failure

Liepollo Lebohang Pheko, a policy and advocacy director at The Trade Collective, believes nationalisation of the Zambian mines was not bad in principle, but points out that the Mulungushi Economic Reforms, which paved the way for state intervention in the economy, lacked backup.

“Nationalisation enabled the state to control 80% of the economy through parastatals involved in mining, energy, transport, tourism, finance, agriculture, trade, manufacturing and construction,” she says.

“The state became the engine of growth, but the challenge was balancing this with global imperatives, development ideas and even the effects of the apartheid regime, which sought to destabilise economies of the Frontline States – a grouping of southern African countries at the forefront of rendering support to the ANC, of which Zambia was chairman.

“So, perhaps what the reforms lacked was a contingency plan,” contends Pheko.

She enumerates reasons for Zambia’s failure as follows: Import substitution industries proved inefficient and uncompetitive due to high input costs, high monopoly prices, reliance on government subsidies, lack of technological dynamism and under-utilisation of capacity and labour.

Pheko further contends the Industrial Development Corporation (INDECO) failed to reduce dependence on foreign imported inputs, in addition to failure to create substantial employment opportunities due to capital-intensive machinery, and catering to a small urban market at the neglect of the poor majority in rural areas.

Pheko, who was born in Zambia, says it is worth noting that crucially it was INDECO that failed to advance beyond production of non-durable consumer goods to durable and capital goods.

Fourth, the bias against agriculture and rural areas meant the continued dependence on the copper mining industry.

The fifth factor is that the bias against exports and import restrictions resulted in higher exchange rates and reduced the gains from exports.

Sixth, Zambia’s support for the liberation movements in southern Africa (including the ANC) and closure of the border following the Unilateral Declaration of Independence by Rhodesia, seriously affected implementation of development plans, as alternative export routes had to be built, particularly the Tanzania-Zambia Railway.

“There appears to have been a strong correlation between the decline in copper revenue and the government’s appetite to borrow abroad in a bid to maintain its import capacity for both consumption and investment: When both copper and production prices declined sharply in the early 1980s, Zambia’s net external borrowing per annum tripled (at constant prices), while world interest rates increased,” Pheko explains.

Mismanagement of the economy at large

Liberal economic policies, foreign assistance and democratisation did not spur economic recovery, sustainable development and poverty reduction.

Pheko says the problem of scarcity of skills was not confined to mining, but was a structural problem, cutting across agriculture, manufacturing and other viable sectors.

The manufacturing industry equally collapsed partly due to mismanaged privatisation, and partly due to competition from Zimbabwean and South African manufacturers.

“Liberalisation was accompanied by corruption, which also contributed to poor economic performance. Rampant graft had permeated all institutions of government,” notes Pheko.

The decision to re-privatise ZCCM came largely as one aspect of reform policies under the Structural Adjustment Programme. It had become inevitable – even the previous government had realised this.

But the idea favoured by the Kaunda regime was to allow a revamped ZCCM to continue operations as a state-owned firm, complemented in the industry by private companies that were to be issued licences for new exploration and exploitation of minerals.

This is the same model some proponents are calling for in South Africa, as opposed to wholesale nationalisation of mines. The African Exploration Mining and Finance Corporation, a state-owned mining entity, could play this role.

This is akin to the Chilean model where the state runs Codelco (Corporación Nacional del Cobre de Chile), the mining giant, while new copper mining developments are given to private investors.

More pointers for South Africa

The policy of import substitution and economic liberalisation without reorientation from copper mining to export-oriented industrialisation has proved unsustainable to economic development.

Consequently, Zambia has become one of the poorest in the world and suffers from economic decline, with little prospects for recovery.

“In Africa, we have learnt many lessons about the challenges of nationalisation: Experiences from Zambia, Uganda and the DRC tell us that the state is just not always a good fit in the mining industry where the deepest and most sophisticated mines require the highest level of expertise in engineering, management, marketing and maintenance of assets,” explains Pheko.

Political myopia or economic ignorance?

At independence, Zambia’s economy was dependent on copper mining, which accounted for 90% of export earnings. The country’s leadership was committed to promotion of economic development and restructuring the economy.

Admittedly, there were reasonable growth rates in the 1960s and early 1970s, primarily due to high copper production and prices, and increase in maize and manufacturing output, as well as increases in the number of social facilities and physical infrastructure, according to Pheko.

However, the nationalisation programme in general, and import substitution in particular, proved very costly. Zambia failed to diversify the economy from copper mining, and the import substitution strategy proved unsustainable, resulting in economic decline.

A can of woes

A decline in world copper prices since 1974 contributed to Zambia’s economic ruin, causing reduced government expenditure on development, including import substitution industries, inability to import goods, particularly inputs into manufacturing; balance of payment problems; and inability to service external debt.

Lack of savings by the government during periods of high copper prices to cushion the impact of any fall in copper prices worsened the economic situation, according to Pheko.

Instead of accumulating savings, the government of the day increased expenditure on social and physical infrastructure, imported luxury goods, assisted parastatal and private companies to ‘manufacture profits’ and compensated workers with high wages, particularly miners.

Secondly, extensive state intervention gave rise to bureaucratisation, corruption and uncertainty, discouraging productive private investment and foreign trade initiatives.

Zambia’s poor economic performance since 1991 can be attributed to two other inter-related factors:

Firstly, the political elite had no well-defined, long-term policies and strategies for development. They only had a short-term vision of overthrowing the government of Kaunda.

Secondly, the excessive reliance on and unconditional acceptance of the International Monetary Fund/World Bank-prescribed economic remedies reduced the state’s capacity to develop the economy.

Conclusion

According to CAI, Zambia’s nationalisation programme in general was ill-timed, as the oil crises and the decline in global copper prices resulted in the country’s severe debt crisis. This was exacerbated by centralising the economy, thus increasing copper dependency and resulting in severe economic decline.

Investment in the wrong sectors and no investment in the mining sector in order to open new mines, led to production costs rising.

This made exploiting resources in the existing mines that much more expensive.

As such, all these factors led to Zambia’s nationalisation of its mining sector, in particular, to fail dismally; and the only way to rectify this was to privatise the industry in order to attract foreign investment.

CAI further notes that Zambia has not really reaped too many benefits from international involvement (privatisation) in the country’s copper sector. Most of the potential benefits that existed turned into somewhat negative impacts, namely the reduced government income from copper mining taxes and royalty taxes; the casualisation of labour, as many Zambians are only employed on a short-term basis, not to mention the flooding of Chinese labourers at Chinese-owned mines; and mine safety problems that killed 49 miners in an explosion in 2005.

CAI concludes that the Zambian government may need to re-evaluate its mining policies and legislation in order to garner the maximum benefits from the copper industry and creating an enabling environment for those rewards to trickle down to the local population

This article was originally published by Zambian Watchdog

Photo Credits: Flickr CC mm-j, villeton and bbcworldservice

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